Choosing The Right Option At Retirement – Investment-linked Annuities

Investment Linked Annuities

There are numerous options for producing income in retirement from your accumulated pension funds.

In the first of a series of articles, Choosing The Right Option At Retirement – Introduction, we took a look at the important issues one must consider when approaching their retirement and seeking to take benefits from their pensions.

In a second article we took a look at guaranteed annuities. Here we will examine a variation on the theme in the form of investment-linked annuities.

To clarify, the definition of an annuity is a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life. The consideration is a premium paid either in prior instalments or usually, particularly where pension income is concerned, as a single payment in the form of a pension fund that has been accumulated in the years leading to retirement. Guaranteed annuities are still by far the most popular method of deriving retirement income and the principle reason for this popularity is that they do so without risk. However, some providers offer investment-linked annuities.

The objective of the these plans is to provide both a degree of security and the opportunity to provide potential increases to the annuity linked to the underlying performance of investment assets, typically stocks and shares, also known as equities, and property.

Modern versions of these arrangements endeavour to offer a middle ground between the assurance of annuities and the flexibility of Capped Drawdown (I will comment in more detail on this latter option in a forthcoming article). They do this by offering some degree of inherent guarantee, usually by way of a limited downside or level below which the income cannot fall. Meanwhile the annuitant can set their income level within a pre-defined range, which is linked to investment returns and is reviewed periodically.

Investment-linked annuitants may be allowed to anticipate future returns and take a higher income level, however, if these returns fail to materialise then income levels may fall. For this reason, With Profit annuities have proved distinctly more popular as they offer the prospect of smoothed returns. By their very nature, those looking to annuities in their retirement are likely to be more cautious, hence why this is a popular route.

The benefit of these types of arrangements is that they produce a reasonably stable income with the potential for increases in income levels coming by way of investment returns. The downsides would be similar to those associated with guaranteed annuities including the lack of flexibility of income, although as stated some recent product introductions into the market now permit a degree of flexibility when choosing income levels.

Every individual’s circumstances are different. If you would like to discuss your own retirement income planning, please do not hesitate to contact us for a free consultation.